Managing Debt after Death can be a Challenge for Heirs

May 24, 2023

Part of estate planning is considering how future repayment of debts, both owed to the person and debts they are responsible for, will impact inheritances received by beneficiaries. A recent article from Lake County News, “Estate Planning: Debts and Estate Planning,” explains how the process works. Managing debt after death can be a challenge for heirs.

Assets passing to a beneficiary directly, outside of probate, are not typically subject to paying a decedent’s debts. These are life insurance proceeds, joint tenancy assets, Payable on Death (POD) and Transfer on Death (TOD), to name a few.

The estate plan must consider how much debt exists and how it might be paid. One approach is to purchase life insurance made payable to the trust estate.

A person may specifically gift real property, which would be subject to repaying an outstanding debt, like a mortgage.

If the beneficiary who would otherwise receive the residence takes it subject to repaying the secured debt, other assets in the estate would need to be reduced to pay the debt.

This should be addressed when the estate plan is created and must be expressly documented. If not addressed, the default rule is that any secured debt goes with the gift. It’s not likely to have been the plan. However, this is how the law works.

Third, parents and children may loan money between themselves. This is usually between parent and child.

Such family debts merit attention during estate planning. For example, parents may wish to loan money to a child to pay higher education costs, to buy a home, or to launch a business.

Upon the death of the parent, should any unpaid balance be repaid by the child to the parent’s estate, or should the child’s debt be forgiven? This must also be clearly stated in the will or trust, whatever is relevant.

If the parent wishes the child to pay the unpaid balance, the debt obligation and its payment history must be in writing and updated. The debt may be assigned to the parent’s trust and enforced by the successor trustee.

At death, the unpaid balance would need to be added back into the estate’s value to arrive at the correct gross value necessary to assess each share of the total estate.

The unpaid balance is usually subtracted from the debtor’s share.

Children might also be owed money from a parent. For example, the adult child might provide at-home personal care services to their parent, or money may be lent to help with the parent’s cost of living. The debt and repayment history also needs to be in writing and updated regularly.

Debt must be acknowledged, and the means of repaying the debt must be made clear. Managing debt after death can be a challenge for heirs. An estate planning attorney will help document and build repayment into the estate plan. If you would like to learn more about probate and trust administration, please visit our previous posts.

Reference: Lake Country News (April 29, 2023) “Estate Planning: Debts and Estate Planning”

Protecting Assets in a Second Marriage can be a challenge

May 23, 2023

Protecting assets in a second marriage can be a challenge. Parents in second marriages may want to leave assets to their children and try to make sure that their stepchildren don’t inherit. However, if stepchildren inherit, it can create resentment leading to legal disputes that can cost the estate significantly in delay and attorney fees.

AOL’s recent article, “How to Protect Assets From Stepchildren,” says that taking specific estate planning steps will let you effectively protect your assets from stepchildren.

If a stepchild inherits some of your assets, your children may feel cheated out of their rightful inheritance. Therefore, they may contest any awards to stepchildren to protect their interests.

Your children will be recognized as heirs to your estate even without a will naming them as beneficiaries. Stepchildren don’t have the same rights.

In most cases, they won’t inherit from a deceased stepparent’s estate unless specifically listed as beneficiaries in the will. However, stepchildren still may receive assets from your estate if your spouse dies after you and leaves assets to their children. Preventing stepchildren from ever getting assets from your estate can be done. However, it requires definite action to exclude them as beneficiaries.

If your spouse from a second or later marriage dies first, you usually don’t have to do anything to prevent stepchildren from receiving assets you control.

Even after an intestate death that happens without a valid will, stepchildren typically aren’t recognized as having any right to assets in the estate. However, some states grant stepchildren some rights of inheritance. Ask an experienced estate planning attorney about this.

In addition, a will can name specific people, including stepchildren, and exclude them from receiving benefits from the estate.

Using a trust, you can ALSO prevent stepchildren from getting assets from your estate after you die.

This can help avoid conflicts and potential litigation from children upset because stepchildren received assets from the estate.

Protecting assets in a second marriage can be a challenge. Remember that if you fail to act, stepchildren can still benefit even at the expense of your children if, for example, you die before your spouse, who then names their children as beneficiaries of the estate. If you would like to learn more about remarriage protection, please visit our previous posts.

Reference: AOL (April 26, 2023) “How to Protect Assets From Stepchildren”

Photo by Oană Andrei

Tax Scams Involving Charitable Remainder Annuity Trusts

May 22, 2023

If you are a wealthy family looking into estate planning, beware of tax scams involving Charitable Remainder Annuity Trusts. The IRS has issued a warning about promoters aiming specifically at wealthy taxpayers, advises a recent article, “IRS Warns Of Tax Scams That Target Wealthy,” from Financial Advisor. Charitable Remainder Annuity Trusts (CRATs) are irrevocable trusts that allow individuals to donate assets to charity and draw annual income for life or for a fixed period. A CRAT pays a dollar amount each year, and the IRS examines these trusts to ensure they correctly report trust income and distributions to beneficiaries. Of course, tax documents must also be filed properly.

Some sophisticated scammers boast of the benefits of using CRATs to eliminate ordinary income or capital gain on the sale of the property. However, property with a fair market value over its basis is transferred to the CRAT, the IRS explains, and taxpayers may wrongly claim the transfer of the property to the CRAT, resulting in an increase in basis to fair market value, as if the property had been sold to the trust.

The CRAT then sells the property but needs to recognize the gain due to the claimed step-up in basis. The CRAT then purchases a single premium immediate annuity with the proceeds from the property sale. This is a misapplication of tax rules. The taxpayer or beneficiary may not treat the remaining portion as an excluding portion representing a return of investment for which no tax is due.

In another scam, abusive monetized installment sales, thieves find taxpayers seeking to defer the recognition of gain at the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer for a fee. These sales occur when an intermediary purchase appreciated property from a seller in exchange for an installment note, which typically provides interest payments only, with the principal paid at the end of the term.

The seller gets the larger share of the proceeds but improperly delays recognition of gain on the appreciated property until the final payment on the installment note, often years later.

Anyone who pressures an investor to invest quickly, guarantees high returns or tax-free income, or says they can eliminate taxes using installment sales, trusts, or other means, should be dismissed immediately. Beware of tax scams involving Charitable Remainder Annuity Trusts. Your estate planning attorney is well-versed in how CRATs, LLCs, S Corps, trusts, or charitable donations are used and will steer you and your assets into legal, proper investment strategies. If you would like to learn more about charitable giving, please visit our previous posts.

Reference: Financial Advisor (April 24, 203) “IRS Warns Of Tax Scams That Target Wealthy”

Use Estate Planning to Prepare for Cognitive Decline

May 18, 2023

Since 2000, the national median age in the U.S. has increased by 3.4 years, with the largest single year gain of 0.3 years in 2021, when the median age reached 38.8 years. This may seem young compared to the life expectancies of older Americans. However, the median age in 1960 was significantly lower, at 29.5 years, according to the article “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans” from Think Advisor. As we get older, it is wise to use your estate planning to prepare for cognitive decline.

An aging population brings many challenges to estate planning attorneys, who are mindful of the challenges of aging, both mental, physical and financial. Experienced estate planning attorneys are in the best position to help clients prepare for these challenges by taking concrete steps to protect themselves.

Individuals with cognitive decline become more vulnerable to potentially negative influences at the same time their network of trusted friends and family members begins to shrink. As people become older, they are often more isolated, making them increasingly susceptible to scams. The current scam-rich environment is yet another reason to use estate planning.

When a person is diagnosed with Alzheimer’s or any other form of dementia, an estate plan must be put into place as soon as possible, as long as the person is still able express their wishes. A diagnosis can lead to profound distress. However, there is no time to delay.

While typically, the person may state they wish their spouse to be entrusted with everything, this has to be properly documented and is only part of the solution. This is especially the case if the couple is close in age. A secondary and even tertiary agent needs to be made part of the plan for incapacity.

The documents needed to protect the individual and the family are a will, financial power of attorney, durable power of attorney and health care documentation. In addition, for families with more sophisticated finances and legacy goals, trusts and other estate and tax planning strategies are needed.

A common challenge occurs when parents cannot entrust their children to be named as their primary or secondary agents. For example, suppose no immediate family members can be trusted to manage their affairs. In that case, it may be necessary to appoint a family friend or the child of a family friend known to be responsible and trustworthy.

The creation of power of attorney documents by an estate planning attorney is critical. This is because if no one is named, the court will need to step in and name a professional guardian. This person won’t know the person or their family dynamics and may not put their ward’s best interests first, even though they are legally bound to do so. There have been many reports of financial and emotional abuse by court-appointed guardians, so this is something to avoid if possible. An experienced attorney will make sure you are using your estate planning to prepare for cognitive decline. If you would like to learn more about elder care planning, please visit our previous posts.

Reference: Think Advisor (April 21, 2023) “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans”

Paper Documents You will always Need in your Planning

May 17, 2023

So much of our lives is digital now. From our phones to parts of our cars, many things that used to be tangible are now virtual. This can also include important documents involved in your planning. There are some paper documents that you will always need in your estate planning. Many important documents, such as a social security card or birth certificate, may be decades old. Therefore, if they get lost, you should know how to replace them. AARP’s recent article entitled, “You’ve Lost an Important Document. Now What?” breaks it down for you.

Passport. To avoid becoming a victim of identity theft, report a lost or stolen passport by calling 877-487-2778 or completing Form DS-64 online at travel.state.gov. You can also print the form at the website and mail it to the U.S. State Department. To get a replacement passport, you must submit a Form DS-11 in person at a passport office.

Birth certificate. Contact the vital records office in the state where you were born and order a replacement.

Marriage certificate. Contact the clerk of the county where the license was issued. This office will let you know the documents required, the cost and how the copy can be issued (online, by mail, or in person).

Social Security card. First, consider the need for a replacement because you rarely need the physical card. However, a replacement card should be obtained if you’re starting a new job or live in a state where you need it to apply for a Real ID. To obtain a new Social Security card, you’ll need a birth certificate, driver’s license, state-issued identification card, or a passport. You should then complete an application on the Social Security website (ssa.gov) and mail or take your application and original documents to your Social Security office (the website has information on locations). The replacement card is free.

Will. Laws relating to estate planning are different in each state. However, generally, if your will was accidentally lost or destroyed and not revoked, it will still be valid and represent your wishes. A copy of the will can be submitted to the court at your death. However, you must have left behind clear evidence that you didn’t revoke it—proof that it was accidentally destroyed or lost or testimony from an impartial third party stating that you didn’t plan to change it. Your heirs will also need evidence that it’s a true copy, which the original witnesses or attorney can confirm.

Car Title. The replacement process for the title to your vehicle varies by state. Contact your Department of Motor Vehicles. You may be able to submit a form, or you have to submit a photo ID, vehicle registration, or registration renewal notice.

While the convenience and portability of digital documents is helpful, there will always be paper documents you will need in your estate planning. Ensure you have a plan to protect your documents. Work closely with an experienced estate planning attorney to get it done. If you would like to learn more about essential estate planning documents, please visit our previous posts.

Reference: AARP (Feb. 14, 2023 ) “You’ve Lost an Important Document. Now What?”

Blended Families face Unique Planning Decisions

May 16, 2023

Blended families are now nearly as common as traditional families. Blended families face unique estate planning decisions, says a recent article, “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families” from Forbes.

Estate planning starts with a will. Naming an impartial executor may require more consideration than in traditional families where the eldest child is the likely candidate. The will also needs to nominate a guardian for minor children and appoint a power of attorney and healthcare proxy in case of incapacity. Traditional wills used to provide instructions for asset distribution may have limitations regarding blended families. Trusts may provide more control for asset distribution.

Wills don’t dictate beneficiaries for life insurance policies, retirement plans, or jointly owned property. However, wills are also subject to probate, which can become a long and costly process that opens the door for wills to be challenged in court.

Wills also become public documents once they are entered into probate. Any interested party may request access to the will, which may contain information the family would prefer to have private.

Trusts allow greater control over how assets are managed and distributed. Their contents remain private. There are many different types of trusts used to accomplish specific goals. For instance, a Qualified Terminal Interest Property Trust (QTIP) can provide income for a surviving spouse, while passing the rest of the assets to a client’s children or grandchildren.

Another type of trust is designed to skip a generation and distribute trust assets to grandchildren or those at least 37.5 years younger than the grantor. Some may choose to use this Generation-Skipping Trust (GST) to keep wealth in the family, by bypassing children who have married.

An IRA legacy trust can be the beneficiary of an IRA instead of family members. This option lets owners maintain creditor protection only sometimes afforded to one who inherits an IRA. The account owner may also want to use an IRA’s required minimum distributions (RMDs) to benefit a second spouse during their lifetime and leave the remainder to their children.

Couples entering a second or third marriage need to be transparent about their expectations of what each spouse will receive upon their death or in the event of divorce and whether or not they agree to waive their right to contest these commitments. A prenuptial agreement is a legal contract spelling out the terms before marriage. For example, in some instances, the prenup requires each spouse to maintain life insurance on the other to ensure liquidity, either from the policy’s death benefit or its cash value.

A final consideration is ensuring that all documentation created is easy to understand, clear and concise. Blended families face unique estate planning decisions. Make sure to spell out the full names of beneficiaries for wills, trusts and life insurance, and include their birthdates, so it is easy to identify them and they cannot be confused with someone else. Estate planning is an ongoing process requiring review regularly to keep the estate plan consistent with the family’s evolving needs and goals. If you would like to learn more about planning for blended families, please visit our previous posts.

Reference: Forbes (April 19, 2023) “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families”

Singles Need Estate Planning for Incapacity

May 15, 2023

Estate planning is even more critical for singles than married couples—and it has nothing to do with whom you’ll leave assets to when you die. A recent article from AARP, “6 Estate Planning Tips for Singles,” explains how estate planning addresses support during challenging life events. Singles need estate planning during their lifetime for issues such as incapacity.

Estate planning addresses medical and financial decisions for an incapacitated person. For singles, these may be more complex questions to answer.

Whether someone has never married or is divorced or widowed, these are challenging questions to answer. However, they must be documented. In addition, singles with minor children need to nominate a trusted person who can care for their children if they cannot. Estate planning addresses all of these issues.

To be sure you complete this process, start with a conversation with an experienced estate planning attorney. This will help with accountability, ensuring that you start and finish the process.

Here are some pointers for singles who keep putting this vital task off:

What would happen if you don’t leave clear instructions about who will make medical decisions in case of incapacity? A doctor who doesn’t know your wishes will decide for you. If you don’t want to be placed on a ventilator for artificial breathing or fed by a stomach tube while in a coma, the decision will be made regardless of your wishes.

Dying without a will is known as dying “intestate.” All of your assets will be distributed according to the intestate succession laws in your state. If no relatives come forward to claim your property, the state receives your assets. This is not what most people want.

Part of your estate plan includes naming a personal representative—an executor—who will oversee your affairs after your death. You’ll want to designate someone who is organized, has good judgment and can handle financial matters. You should also name a backup, so that if the first person cannot or does not wish to serve, there will be someone else to take control. Otherwise, the court will name someone who doesn’t even know you to take on this task. It’s better to designate someone than leave this to the state.

Your estate plan includes the following:

Last will and testament. This is where you nominate your executor, heirs and how your assets will be distributed. You can also appoint a guardian for minor children. Note that anyone named as a beneficiary on a retirement, insurance policy, or investment account supersedes any instructions in your will, so be sure to update those and check on them every few years to be sure they are still aligned with your wishes.

Living trust. This is a legal entity owning assets to be given to beneficiaries, managed by a trustee of your choosing, and avoids the delays and costs of probate.

Financial Power of Attorney (FPOA). This document authorizes someone you name to act as your agent and make financial decisions if you cannot. An FPOA can prevent delays in accessing bank and investment accounts and paying your bills. The FPOA ends upon your death.

Living will, durable medical power of attorney, or advance health care directive. These documents allow you to designate someone to communicate your health care wishes when you cannot. For example, you can include instructions on pain management, organ donation and your wishes for life support measures.

Health care power of attorney (HPOA). Like the living will, which is more associated with end-of-life care, the HPOA lets someone make medical treatment decisions on their behalf.

Singles need estate planning to protect themselves for incapacity. Be sure to communicate your wishes with family and friends. Tell your executor where your documents may be found and provide them with the information they’ll need so they may act on your behalf. If you would like to learn more about planning for incapacity or disability, please visit our previous posts.

Reference: AARP (April 7, 2023) “6 Estate Planning Tips for Singles”

Avoid Unintended Consequences with your Planning

May 11, 2023

The mistake can be as simple as signing a document without understanding its potential impact on property distribution, failing to have a last will and testament properly executed, or expecting a result different from what the will directs. Unfortunately, these unintended consequences are relatively common, says the article “Advice for avoiding unintended issues in estate planning” from The News-Enterprise. You can avoid unintended consequences with your planning by working with an estate planning attorney.

The most common mistake that leads to unintended consequences is leaving everything to a spouse in a blended family. Even if children don’t have a close relationship with their stepparent, they’re willing to get along for the sake of their biological parent. However, when the first spouse dies, the decedent’s beneficiaries are generally disinherited if the surviving spouse receives the entire estate.

If the family truly has blended and maintains close relationships, the surviving spouse may ensure that the decedent’s children receive a fair share of the estate. However, if the relationships are tenuous at best, and the surviving spouse changes their will so their biological children receive everything, the family is likely to fracture.

Using a revocable living trust as the primary planning tool is a safer option. An experienced estate planning attorney can create the trust to allow full flexibility during the lifetime of both spouses. Upon the first spouse’s death, part of the estate is still protected for the decedent’s intended beneficiaries.

This way, the surviving spouse has full use of marital assets but can only change beneficiaries for his or her portion of the estate, protecting both the surviving spouse and the decedent’s intended beneficiaries.

Another common mistake occurs when married couples execute their last will and testaments with different beneficiaries. For example, if they’ve named each other as the primary beneficiary, only the survivor will have property to leave to loved ones.

An alternative is to decide what the couple wants to happen to the estate as a whole, then include fractional shares to all beneficiaries, not just the one spouse’s beneficiaries. This protects everyone.

Many people assume that if they die without a will, their spouse will inherit everything. Unfortunately, this is not always the case, and a local estate planning attorney will be able to explain how your state’s laws work when there is no will. Children or other family members are often entitled to a share of the estate. This may not be terrible if the family is close. However, if there are estranged relationships, it can lead to the wrong people inheriting more than you’d want.

Failing to plan in case an heir becomes disabled can cause life-altering problems. If an heir develops a disability and receives government benefits, an inheritance could make them ineligible. The problem is that we don’t know what state of health and abilities our heirs will be in when we die, and few will want their estate to be used to reimburse the state for the cost of care. A few extra provisions in a professionally prepared estate plan can result in significant savings for all concerned.

Estate planning is about more than signing off on a handful of documents. It requires thoughtful consideration of goals and potential consequences. Can every single outcome be anticipated? Not every single one, but certainly enough to be worth the effort. You can avoid unintended consequences with your planning by working with an experienced estate planning attorney. If you would like to learn more about mistakes in your estate planning, please visit our previous posts.

Reference: The News-Enterprise (March 25, 2023) “Advice for avoiding unintended issues in estate planning”

Photo by Mikhail Nilov

Protecting Assets with a Trust vs. LLC

May 10, 2023

While trusts and Limited Liability Companies (LLCs) are very different legal vehicles, they are both used by business owners to protect assets. Understanding their differences, strengths and weaknesses will help determine whether protecting assets with a trust vs a LLC is best for your situation, as explained by the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report.

A trust is a fiduciary agreement placing assets under the control of a third-party trustee to manage assets, so they may be managed and passed to beneficiaries. Trusts are commonly used when transferring family assets to avoid probate.

A family home could be placed in a trust to avoid estate taxes on the owner’s death, if the goal is to pass the home on to the children. The trustee manages the home as an asset until the transfer takes place.

There are several different types of trusts:

A revocable trust is controlled by the grantor, the person setting up the trust, as long as they are mentally competent. This flexibility allows the grantor to hold ownership interest, including real estate, in a separate vehicle without committing to the trust permanently.

The grantor cannot change an irrevocable trust, nor can the grantor be a trustee. Once the assets are placed in the irrevocable trust, the terms of the trust may not be changed, with extremely limited exceptions.

A testamentary trust is created after probate under the provisions of a last will and testament to protect business assets, rental property and other personal and business assets. Nevertheless, it only becomes active when the trust’s creator dies.

There are several roles in trusts. The grantor or settlor is the person who creates the trust. The trustee is the person who manages the assets in the trust and is in charge of any distribution. A successor trustee is a backup to the original trustee who manages assets, if the original trustee dies or becomes incapacitated. Finally, the beneficiaries are the people who receive assets when the terms of the trust are satisfied.

An LLC is a business entity commonly used for personal asset protection and business purposes. A multi-or single-member LLC could be created to own your home or business, to separate your personal property and business property, reduce potential legal liability and achieve a simplified management structure with liability protection.

The most significant advantage of a trust is avoiding the time-consuming process of probate, so beneficiaries may receive their inheritance faster. Assets in a trust may also prevent or reduce estate taxes. Trusts also keep your assets and filing documents private. Unlike a will, which becomes part of the public record and is available for anyone who asks, trust documents remain private.

LLCs and trusts are created on the state level. While LLCs are business entities designed for actively run businesses, trusts are essentially pass-through entities for inheritances and to pass dividends directly to beneficiaries while retaining control.

Your estate planning attorney will be able to judge whether protecting your assets with a trust vs an LLC is the best option for you. If you own a small business, it may already be an LLC. However, there are likely other asset protection vehicles your estate planning attorney can discuss with you. If you would like to learn more about business planning, please visit our previous posts.

Reference: Business Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”

How an Annuity Beneficiary Works

May 9, 2023

It is important to understand how an annuity beneficiary works. If the beneficiary of an annuity is your spouse, they can take over ownership of the annuity and receive payments under the annuity schedule. The annuity would be tax-deferred, and your spouse would only owe taxes on the distributions when they take them, says Forbes’ recent article, “What Is An Annuity Beneficiary?

However, the rules differ if your beneficiary is someone other than your spouse. A non-spouse has three options when inheriting an annuity:

A lump sum payment. The beneficiary gets the annuity’s remaining value as one upfront payment and must pay income taxes immediately on the lump sum.
Nonqualified stretch, where the annuity payouts—and the required income taxes—are stretched throughout the beneficiary’s lifetime; or
Beneficiaries can withdraw smaller amounts from the annuity during a five-year period after the annuity holder’s death or withdraw the entire amount in the fifth year.

Only the annuity owner can name a beneficiary. However, they can change beneficiaries at any time, provided the annuity contract doesn’t require you to name an irrevocable beneficiary. You can also choose multiple beneficiaries, designating a percentage of the annuity for each person. Annuity contracts also frequently let you designate a contingent beneficiary—a person who will get the annuity payments if the primary beneficiary dies before the annuity owner does.

The choice of beneficiary also significantly impacts how taxes are handled, so taking the time to document your wishes can save your loved ones from problems in the future.

While you aren’t required to name a beneficiary when you purchase an annuity, it’s highly recommended.

Suppose you don’t have a designated beneficiary in the annuity contract. In that case, the annuity must go through probate—the legal process for recognizing a will and distributing the assets within an estate.

These proceedings can be expensive and time-consuming. It could be several months before everything is resolved and the heirs receive their inheritance. An estate planning attorney will help you understand how an annuity beneficiary works and how to ensure your planning addresses your needs. If you would like to learn more about the role of the beneficiary, please visit our previous posts.

Reference: Forbes (Jan. 19, 2023) “What Is An Annuity Beneficiary?”

Image by Mimi from Pixabay

Blog Articles

Managing Debt after Death can be a Challenge for Heirs

Protecting Assets in a Second Marriage can be a challenge

Tax Scams Involving Charitable Remainder Annuity Trusts

Blended Families face Unique Planning Decisions

Singles Need Estate Planning for Incapacity

Avoid Unintended Consequences with your Planning

Protecting Assets with a Trust vs. LLC

How an Annuity Beneficiary Works

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